Since OPEC persuaded Russia and other non-OPEC producers to join in an oil market stabilization plan in 2016, the 24 producers party to the agreement have been waiting for U.S. shale oil production to peak. OPEC’s latest World Oil Outlook covering 2018-40 shows that the wait will not be over any time soon.

The medium-term outlook sees a continued loss in OPEC’s share of the oil market as the surge in U.S. shale output is seen growing to 2024 and eroding the 14-member group’s share of the market, which will fall to 31% in 2024 from 37% in 2018. Total OPEC production will decline from 36.6 million barrels per day in 2018 to 32.8 mb/d in 2024. In contrast, U.S. oil production will continue to grow, rising from 16.7 mb/d to 22.8 mb/d during the same period, accounting for more than 60% of total non-OPEC supply growth. The numbers are for total liquids production, which includes crude oil, natural gas liquids, and biofuels. Total non-OPEC liquids will grow by 9.9 mb/d between 2018 and 2024, mostly from U.S. tight oil, but Brazil, Norway, Canada, Guyana, and Kazakhstan will also contribute to the increase. That is an upward revision from the 2018 report, which estimated the 2040 non-OPEC output at 62.6 mb/d. Virtually all other non-OPEC producers are expected to see a decline in long-term production.

Medium-Term Oil Demand Outlook, 2018-24
(in million barrels per day)

According to OPEC, the tide turns in its favor in the second half of the next decade, when OPEC expects U.S. production growth to slow and make way for the lower cost producers, most of which are in the Middle East. By 2040, OPEC’s share of the market is seen rising to 40% with oil and gas making up 53% of the energy mix, a mere 1% down from the current level despite the global trend to decarbonize. Demand for OPEC liquids is projected to increase to around 44.4 mb/d in 2040 from 36.6 mb/d in 2018. “Over the forecast period, the major oil trade route remains the Middle East to Asia-Pacific with total exports from the Middle East rising by 7 mb/d,” according to OPEC.

Long-Term Oil Demand by Region, 2018-40
(in million barrels per day)

U.S. tight oil supply is expected to peak at 17.4 mb/d by 2029 while the total U.S. liquids supply is seen peaking at 22.8 mb/d in the mid-2020s.

OPEC Secretary General Mohammad Sanusi Barkindo said in an interview after the World Oil Outlook was released November 5 that while shale oil had revolutionized the oil industry, conventional oil would make a comeback in the longer term. “OPEC will continue to serve as the baseload for global energy requirements. The shale producers in particular in the United States have done extremely well in the last several years to revolutionize this industry and we are beginning to see deceleration as we go into the medium term. I think it is a growing consensus that going beyond the medium term, the world will revert back to the conventional oil, the producers mainly in OPEC who account for over 80% of global proven reserves,” he told CNN.

But the International Energy Agency presents a different narrative for shale oil and it makes for grim reading for OPEC and its allies. The IEA’s World Energy Outlook, released shortly after the OPEC long-term report, sees a longer shelf life for U.S. shale. It sees shale oil staying “higher for longer …, reshaping global markets, trade flows and security.”

According to the IEA, annual U.S. production growth slows from the “breakneck pace” of recent years. However, updated official estimates of underlying resources mean the United States will account for 85% of the increase in global oil production to 2030 and for a 30% increase in gas. By 2025, total U.S. shale output of oil and gas overtakes total oil and gas production from Russia.

“Higher US output pushes down the share of OPEC members and Russia in total oil production,” according to the IEA report. This share drops to 47% in 2030, from 55% in the mid-2000s, it adds. This implies that “efforts to manage conditions in the oil market could face strong headwinds” and makes a case for oil producers to diversify their economies.

Much of the market management referred to by the IEA is being led by Saudi Arabia and Russia, though there have always been questions as to Russian commitment to the deal if curbing production in an effort to lift prices ends up benefiting U.S. producers.

Another question regards Saudi Arabia’s ability to maintain a policy of defending price at the expense of market share after the partial privatization of Saudi Aramco, a process that has kicked off.

CNN asked Barkindo if he believed Saudi Arabia, de facto leader of the producers’ club, would remain committed to OPEC after the partial flotation of Aramco, the state-owned oil giant that is responsible for all but a fraction of Saudi Arabia’s oil production. Aramco is offering to sell 3 billion shares, or 1.5% of the company, on Riyadh’s Tadawul stock exchange at an indicative price that values the company at between $1.6 trillion and 1.7 trillion. Allowing investors to own even a sliver of Aramco would raise questions as to whether it would continue to restrict production in accordance with the OPEC and non-OPEC supply cut agreement.

“The kingdom of Saudi Arabia has reiterated times without number its continued commitment … to this organization and we have also heard from the highest levels of government in the kingdom that the IPO [initial public offering] will not in any way impact on their membership or their leadership role that they provide within OPEC,” Barkindo told CNN.

Saudi Arabia, the world’s third largest producer after the United States and Russia, is the de facto leader of OPEC and any change in Riyadh’s oil policy would have an impact on the group’s ability to manage markets, a difficult task given the medium-term outlook for further erosion of OPEC’s market share.

Although the latest outlook revised down estimates for total demand for oil to 110.6 million b/d in 2040 by 1 mb/d from the demand forecast in the 2018 World Oil Outlook, it expects OPEC to have a bigger slice of the market beyond 2025.

However, the slight revision validates OPEC’s analysis of an upward trajectory for oil demand growth while acknowledging the impact of climate change regulations, electrification of the transportation sector, and a growing share for renewables in the electricity sector, coupled with doubts over short-term demand growth.

Total primary energy demand is set to expand by 25% between 2018 and 2040, driven by the doubling of the global economy and population growth. Much of the energy demand growth will come from non-OECD Asia with China and India leading the way. Energy demand in India and China is set to rise on average by 3.2% and 1.1% per year, respectively, which accounts for almost 50% of energy demand growth in non-OECD countries over the forecast period.

OPEC sees oil demand reaching 110.6 mb/d by 2040, a slightly downward revision from the 2018 forecast. The non-OECD countries drive oil demand with expected growth of 21.4 mb/d by 2040, compared to 2018, whereas the OECD region is estimated to contract by 9 mb/d. The IEA sees oil demand at a slightly lower 106.4 mb/d by 2040 but the number would be far lower at 67 mb/d in the IEA’s Sustainable Development Scenario, which would see sharp reductions in oil consumption as a result of stepped up environmental policies and a switch to alternative energy sources.

Oil demand for road transportation will plateau from 2030-40 due to the rise in electric vehicle usage as well as higher fuel efficiency standards for internal combustion engines. By 2040, OPEC sees electric vehicles making up 13% of the fleet. The IEA sees an earlier peak in demand for oil from the transportation sector. It sees sales of traditional engine vehicles declining from the 2020s, leading to a peak in oil use in passenger cars. Electric car sales grow by more than 30 million annually in the IEA’s scenario and, by 2040, there will be 330 million electric cars on the roads, which would reduce oil demand by 4 mb/d.

“The signposts for the next five years indicate demand growth will head towards moderate levels of around 1 mb/d per annum. It will then decline further to almost no growth by the end of the forecast period,” according to OPEC.

Yet it is the renewables sector that picks up momentum with the largest growth in percentage terms “but even by 2040 all renewables combined are only estimated to make up around 19% of the global energy mix,” according to the World Oil Outlook. This shows that despite impressive growth, renewables will not present a challenge to fossil fuels during the outlook period covered. But this does not mean that oil producers can afford to be complacent given that “energy-exporting developing countries are likely to be disproportionately affected by the impacts of climate response measures related to possible economic diversification options.”

It is therefore important for the oil-exporting countries to diversify their economies “to mitigate risk arising from the implementation of climate response measures, …” according to the report.

The Aramco IPO is a key component of efforts by Riyadh to wean the economy off near-total reliance on oil revenue per the Vision 2030 economic reform program. Proceeds from the IPO will be used for investment in the non-oil sector though, conversely, the success of the strategy depends on the price of oil, which at current levels falls short of a reported Saudi target of $70 per barrel.

Barkindo said in presenting the report that the purpose of the outlook is to contribute to OPEC’s commitment “to support sustainable market stability” and help to evaluate the direction of the oil and energy sectors.

He attributed the success of the Declaration of Cooperation, which formalized the agreement between OPEC and the non-OPEC alliance to the restoration of oil market stability. Under an agreement first reached in December 2016, the OPEC and non-OPEC alliance, or OPEC+ group, has removed barrels from the market in an effort to reverse the sharp drop in oil prices in 2014 and 2015. One consequence of the price collapse was a decline in upstream investments in the three years since.

OPEC notes in its outlook that oil-related investments across the upstream, midstream, and downstream are estimated at around $10.6 trillion through 2040 if demand is to be met. The issue of returning global investments “is a core focus of the Declaration of Cooperation,” Barkindo said in his presentation. However, the report also emphasized the need to deploy technologies to reduce emissions amid growing environmental concerns about the impact of emissions from fossil fuels on climate change.

“Banning oil and gas development, as some environmental campaigners have championed, would ignore the reality of rising energy demand, driven by population growth and global economic expansion,” according to OPEC.

As a cleaner fuel, natural gas has been displacing coal in power generation as costs have come down, particularly in the United States. According to OPEC, natural gas will witness the largest demand growth though oil is expected to remain the fuel with the biggest share in the energy mix through 2040. Despite the declining trend in coal demand, coal is still forecast to be the largest source of carbon dioxide emissions, accounting for almost 40% of total emissions in 2040.

Barkindo said OPEC’s World Oil Outlook “underlines the increasingly complex nature of the oil industry, both in the upstream and downstream; the continued energy interdependence of all nations; how security of supply and security of demand are very much interlinked; and the need to better understand the market drivers, challenges, uncertainties, as well as opportunities, we all face. These include such issues as policies, technology developments, energy poverty, climate change and sustainable development.”

It’s a tall order. What is clear is that the industry faces more challenges now than it did nearly 60 years ago. OPEC will need to adapt to new realities in an era of disruption and rapid transformation.